World trade and the environment

Paul Ekins Department of Economics, Birkbeck College, University of London

This article looks at the background to the current debate about trade and the environment, before considering the possible environmental impacts of trade. Several reasons are identified as to why increased trade may impact negatively on the environment, if appropriate domestic and international policies are not in place. Yet, with regard to the former, GATT discourages such policies where they act as non-tariff barriers to trade, and corporations oppose such policies where they are perceived to reduce international competitiveness. The latter are extremely difficult to conclude. Such considerations mean that an indiscriminate thrust towards trade liberalization could seriously hinder moves towards environmental sustainability. The article concludes by setting out a different approach that seeks to secure the benefits of orderly world trade in a context that puts environmental sustainability first.

BACKGROUND

The eminent trade theorist Jagdish Bhagwati is afraid that the worlds trading system i s at risk, a situation he views with great alarm. It i s also an almost undisputed fact that the global environment i s at risk, expressed thus in a joint statement by the U K Royal Society and the US National Academy of Sciences:

Unrestrained resource consumption for energy production and other uses ... could lead to catastrophic outcomes for the global environment. ... Mans own prospects for achieving satisfactory living standards are threatened by environmental deterioration, especially in the poorest countries where economic activities are most heavily dependent upon the quality of natural resources.

If the worlds trading system were to collapse, doubtless much hardship would result. If the global environment were to collapse, the result would be much worse. Insofar as the worlds trading system leads to unrestrained resource consumption that risks catastrophic environmental damage, its operation is a serious cause for concern. Proposals for environmentally sustainable trade must seek to secure the benefits accruing to orderly world trade, but in the context, and only in the context, of moving determinedly towards environmentally sustainable patterns of economic activity. It would be a profound distortion of priorities, of great potential harm to human welfare, for the objectives of the trading system to be allowed to impede progress towards sustainability. This is the challenge facing the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO), its probable successor.

GATT rules provide the essential framework conditions for most world trade and seek to embody for GATTs Contracting Parties (CPs) reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international ~ommerce.~ By 1991, 103 states were CPs to GATT, including the 24 industrialised countries that comprise the OECD and account for 75% of world trade, and another 29 states were applying GATT on a de facto basis.

GATT rules are amended, or their scope enlarged, by periodic Rounds of negotiations, of which the current Uruguay Round, begun in 1986, i s the eighth. The principal objectives of the Uruguay Round are to bring agriculture, textiles and services within the scope of GATT for the first time, and to formulate rules for trade- related investment and intellectual property. In 1991 the GATT Secretariat inserted a proposal in the Draft Final Act of the Uruguay Round to establish a WTO to subsume GATT in future. While negotiations in the Uruguay Round have now been completed, the resulting Act still has to be agreed by governments.

As John Whalley has observed:

Our global trade institutions, (especially GATT), have evolved as i f there were no environmental linkages to trade. l4

However, GATT rules do allow exceptions to be made where necessary to protect human, animal or plant life or health or relating to the conservation of exhaustible resource^.'^ In addition, the Agreement on Technical Barriers to Trade, the Standards Code, concluded in 1979 as part of the Tokyo Round and accepted by 38 countries

4 EUROPEAN ENVl RONMENT

4% WORLD TRADE AND THE ENVIRONMENT by 1991, specifically acknowledges the environment as one of the considerations that can justify the setting of product standards higher than international norms.

Growing evidence of environmental damage from economic activity, a number of environmental disputes under GATT6, and pressure from environmentalists have brought trade-environment linkages into high relief, with calls from some for a new protectionism. This is the context in which the issue of world trade and the environment i s now being debated.

THE ENVIRONMENTAL IMPACTS OF TRADE

One of the principal purposes of trade liberalisation is the expansion of output. If the structure and behaviour of the economy generates pervasive negative environmental externalities as at present, proportionate economic growth wil l increase the absolute level of externality, that is the environmental damage. Of course, this is not an inevitable result. Substituting more damaging factor inputs with less damaging alternatives; more efficient use of the same input; environmentally improved technologies, production processes, and waste management techniques; and changes in economic structure and consumer behaviour can at1 reduce the environmental impact per unit of output. Moreover, as the proponents of free trade have arguedg, it is possible that free trade can improve the environment by helping to generate economic growth and improved living standards, which may both increase the demand for environmental protection and provide the resources necessary for it. However, realising this benign outcome depends on several non-trivial conditions being met.

First, it must be recognised that, i f the expansion of output increases environmental damage, a certain amount of extra environmental protection i s necessary even to maintain environmental quality following such expansion, let alone improve it.

Second, for economic growth to benefit the environment, it i s not enough for it to generate resources that could be spent on environmental protection. They must actually be so. It is a common observation that growing economies around the world often have a deteriorating environment because they do not allocate the resources necessary to maintain environmental quality in the face of growth, far less to improve it.

And, of course, the whole argument depends on the resources generated by growth being able to repair the environmental damage their generation has caused. Where there is irreversible damage to the environment, with no scope for reparation (e.g. when species are made extinct), this is clearly not the case. So although the free trade produces growth which benefits the environment argument emerges as a theoretical possibility, it is not as easily put into practice.

There are other interactions between trade and the environment apart from the possible impact of economic growth. First, a precondition for trade is transportation. Transportation requires fuel, normally fossil fuel. It has been estimated that international trade is responsible for

one eighth of world oil consumption. Thus trade contributes substantially to energy-related environmental damage, such as carbon dioxide emissions and other air pollution. If this damage were reflected in the price of oil (internalized), the trading system and production and consumption patterns might be quite different from todays. Yet in much of the trade literature transport costs are either explicitly assumed to be absent, or simply ignored12.

Second, trade is a mechanism for transferring goods and services from their place of production to another place for consumption. If commodities to be exported are produced in a more environmentally destructive fashion than goods destined for domestic consumption, then producing goods for trade may increase environmental damage. For example, growing cotton, the great majority of which i s exported, accounts for 2 5 % of al l pesticide useI3. The curing of the UKs imports of tobacco burns up nearly 200,000 hectares of woodland every year4.

Furthermore, opportunities for trade can result in changes in land ownership and other property rights. This may be trades most important, and least studied, environmental effect. Where land i s perceived as only valuable for growing food for subsistence, traditional smallholders and indigenous people are more likely to be left undisturbed. Where it i s perceived as being able to grow food for export (i.e. being able to grow money, and foreign currency at that), then powerful ,interests immediately have an incentive to expropriate it from its original farmers. The farmers may then migrate into forests, up hillsides or onto marginal lands not suitable for export crops, where they cause enormous environmental damage. The environmental damage they cause is often blamed on their poverty. Less often is their poverty seen to be the result of powerful expropriators keen to corner the benefits of trade, unrestrained by effective and counteractive domestic, regional and international policies.

If, on the other hand, commodities produced in an environmentally benign way are traded, trade may contribute to improving the environment as well as to development. Hence, there is a need for empirical analysis of how the driving forces related to trade actually affect the environment in the real world. Without a better understanding of such complex relations an uncritical support of free trade as beneficial to solving environmental problems i s both simplistic and unjustified, particularly since the enormous support values of ecological services, biodiversity and healthy ecosystems - the basis for human welfare - hardly ever enter into economic accounts. The maintenance of such values cannot be left to markets, which often either undervalue them or ignore them altogether. They must be explicitly protected by environmental policy.

THE IMPACTS OF ENVIRONMENTAL POLICY ON TRADE

Environmental policy relies on two main kinds of instrument: the levying of taxes on (granting subsidies to)

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PAUL EKlNS 4% activities or products that damage (benefit) the environment, so increasing (reducing) their effective prices; and the adoption of regulations to control environmental impacts directly, which may either act through the price mechanism (e.g. marketable emission permits, deposit refund schemes) or specify environmental variables or technologies explicitly.

The great majority of environmental policy is formulated at the national level, although such international bodies as the European Commission are also important in this field. Global (or potentially global) environmental agreements (e.g. the Montreal Protocol for ozone-depleting substances; the conventions from the Rio Summit) are bound to increase in number, but the difficulties involved in their negotiation will make this growth slow. For the foreseeable future, the national level i s where the requisite environmental policy will have to be enacted i f the phrase 'sustainable development' i s to change from rhetoric to reality.

National environmental policy, whether regulatory or price-based, will change the relative price of domestic products, according to their environmental impacts or those of their processes of production. It is worth noting at this stage that there i s no intrinsic difference in economics between externalities generated by the consumption of products and by the processes and production methods that created those products". Environmental policy wil l need vigorously to address both sources of externality i f sustainable development i s to be achieved.

Changed prices of domestic products mean changed terms of trade and effects on national competitiveness. Where environmental policy seeks to internalise costs, economic theory would expect this to raise domestic prices and have an adverse effect on competitiveness. There is, in fact, some disagreement as to whether environmental policy hinders competitiveness or not, but whatever the balance of evidence, the fact remains that environmental regulations and charges continue to be widely perceived by much business as impacting adversely on competitiveness and are lobbied against accordingly. This raises the possibility that one of the reasons a stronger negative correlation between environmental regulation and competitiveness has not been noted i s that regulations which are perceived as likely to have a significant negative effect are simply not enacted or enforced. Runnalls and Cosbey call this effect 'regulatory chill':

'There has been little research on the pervasiveness of regulatory chill. This may, however, be a more important effect than the actual migration of firms which most studies look for. It may be that for every firm which migrates to escape regulation, a score of others have weakened or prevented regulation by simply threatening to do 5 0 . " ~

If significant, this effect would constitute a major obstacle to the achievement of sustainable development. To neutralise it may require trade policy.

GATT AND ENVIRONMENTAL POLICY

The GATT Secretariat states that:

'GATT rules .., place essentially no constraints on a country's right to protect its own environment against damage from either domestic production or the consumption of domestically produced or imported products. Generally speaking, a country can do anything to imports or exports that i t does to its own products, and it can do anything i t considers necessary to its production proce~ses.~''

Such a categoric statement also makes clear what a country cannot do under GATT rules. It may not use trade policy to protect its environment from foreign production; or to protect the environment outside its own jurisdiction, whether a global commons or the territory of another country; or to impose on imports charges or other restrictions related to their process and production methods (PPMs), even when it i s imposing identical treatment on its own production (i.e. its policy i s non- discriminatory). From an environmental point of view these are considerable constraints on environmental policy.

As far as self-induced environmental degradation in any country's territory i s concerned, one can readily agree in principle with the GATT Secretariat and trade theorists that the first-best means of addressing domestic environmental damage i s likely to be through domestic policy that directly tackles the environmental problem, rather than through trade policy". One may similarly agree that the first-best approach to global environmental problems is through international treaties involving all the relevant parties.

However, in each case the first-best response may not be politically feasible, and i s certainly not likely to be so i f it has serious negative implications for the competitiveness of domestic industry. When world trading rules permit countries to protect their own environments, but not,to protect their domestic industry from competitors who do not do so, then only the countries with the strongest economies wil l be able to maintain domestic environmental protection, which will be under continual siege from those concerned with international competitiveness. The appropriate environmental policies may only be politically feasible if trade policies are used to protect compliant domestic industry against foreign competitors who have lower environmental standards.

At the international level the same problem of feasibility arises. Multi-country environmental treaties are notoriously difficult to conclude. Unilateral actions involving trade policy can sometimes be an effective way of moving towards multilateral agreements or their implementati~n'~. Moreover, trade policies may be among the only available instruments whereby countries that agree among themselves not to damage the global environment can prevent others from doing so. Currently 19 out of 170 international environmental agreements

6 EUROPEAN ENVIRONMENT

4% WORLD TRADE AND THE ENVIRONMENT provide for the use of trade policy to achieve their objectives, either to encourage compliance from signatories or to impose sanctions on non-signatories. It i s not clear that such provisions, especially of the latter kind, are compatible with GATT rules.

It makes no sense to insist on first-best theoretical solutions whe.1 they are not practically feasible. The trade economist W.M. Corden had a more balanced view:

Intervention in trade may not be the best way of dealing with the various problems ... The best way may be to deal with them in some direct first-best way, and at the same time to allow trade to flow freely. Of course, if, for some reason, the first-best ways of correcting the distortions are not used, or cannot be used, then trade intervention may still be better than nothing.*

TOWARDS SUSTAINABLE TRADE

The conclusion as to whether or not GATTs rules need reform to permit more environmental protection depends to a large extent on the relative weights that are given to environmental sustainability and to the benefits that can flow from increased trade. Few would argue that there i s no scope for countries to seek to exploit differences in environmental preferences and endowments to gain competitive advantage in the marketplace, just as countries exploit differences in wages and social conditions to gain such advantage.

However, the post-Rio world i s committed td sustainable development. If this means anything, it must mean that, just as some forms of social exploitation are either not permitted at a l l (e.g. slavery) or are ruled invalid for the purpose of gaining competitive advantage2, so the rules of the world trading system should permit exceptions to encourage moves towards environmental sustainability and to discourage acts of large-scale environmental damage or unsustainable exploitation.

It is absolutely essential that the WTOs articles contain a clear statement of the need for world trade to be compatible with environmental sustainability. Several recent new institutions or agreements, such as the European Bank for Reconstruction and Development or the Treaty on European Union, have explicit commitments to sustainable development, and it would be a most retrograde step if the WTO should depart from such good practice. At a minimum the WTO should have a commitment to sustainable development, and acknowledge and define as closely as possible the conditions of the possible role of unilateral trade measures in moving towards environmental sustainability, while specifying the mechanism to be used for the resolution of disputes.

These exceptions to non-discrimination will not be easy to define. Perhaps at the GATT level they should be left as statements of broad principle, only charging that countries that break GATT rules for stated environmental reasons are in fact able to prove under challenge that

their action could be expected to yield substantial environmental benefits and did not discriminate between domestic and foreign producers beyond what was necessary to achieve this. The US Office of Technology Assessment recommends that changes in the GATT rules might include general guidelines for the use of unilateral trade measures for environmental purposes; while each dispute would still be resolved individually on its own merits, the guidelines could be given some weight.

Of course, it is quite possible that unilateral trade action for environmental reasons will tend to favour domestic over foreign producers, for example in the case of laws obliging the use of returnable bottles, where foreign producers face higher additional costs of transport. Therefore the test of the validity of an environmentally-related trade measure would have to establish that the environmental benefit was both significant and justified the trade distortion introduced.

Certainly it should be recognised that, to promote environmental sustainability, countries should be able to target production processes and methods as well as products. Such recognition should accept the fact that environmental externalities are in effect environmental subsidies that are as economically distorting and unfair as any financial subsidy. GATT rules should bring eco- dumping within the category of legitimate targets of anti- dumping duties and thereby enable countries to protect their PPM environmental standards from subsidised competition.

Countries should also be able to use trade policy to protect the global commons and life therein, as well as environmental assets of global or continental importance. Certainly, too, it should be stressed that the use of trade policy in these instances i s inferior to, and should be used to encourage the adoption of, appropriate domestic environmental policies on the one hand, and binding treaties for international environmental protection on the other.

Undoubtedly the detailed negotiation of such conditions would be a complex political process. To enforce them, a new GATT dispute mechanism, incorporating both environmental and trade expertise, would have to be meticulously set up to cope with the inevitable arguments that environmental ly-motivated trade policies will engender. Needless to say there will be attempts by lobbies and vested interests to use environmentally-related trade measures for the predominant purpose of protecting domestic industries rather than the environment, just as the lobbies and vested interests which stand to benefit from trade involving environmental destruction will resist any attempts to internalise their environmental costs. Of course GATT will need to be vigilant over such attempts. As many studies have shown, protectionism can cause great environmental damage as well as economic inef f i~ iency~~.

But in its deliberation on disputes, GATT will need to be guided first and foremost by the environmental benefits to be secured by trade policies. Bhagwati may be right about the dangers to the world trading system posed

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PAUL EKINS 4% by protectionism. But the dangers pale into insignificance beside the appalling pollution and damage envisaged by the World Banks World Development Report 1992 (p.8) unless current patterns of economic activity are transformed. In the real world, trade policies are likely to play an important role in this transformation.

Finally, it must be recognised that the highly integrated global economy of the 1990s, dominated by the activities of a few hundred transnational corporations, bears little relation to the economic configuration of the post-war 1940s in which the GATT rules were conceived, nor to the models of perfect competition which justified their emphasis on free trade. All but the most committed proponents of the free market recognise that efficient markets need effective governmental frameworks. Yet such a framework at the international level does not exist, leaving a vacuum of missing accountability and potential (and sometimes actual) irresponsibility.

In this context the exclusive GATT focus on removing national protective measures, or limiting their application, although its intention may be the achievement of important social or environmental objectives, i s dangerously inappropriate. Rather the world wil l need to move towards a trading system which i s predicated on such principles of civil, political, economic and social human rights as are enunciated by the United Nations, and in which basic norms of social justice and environmental sustainability are both promoted and enforced. It remains to be seen whether, through reform, GATTs successor can contribute to the achievement of such a system, or whether it wil l prove an obstacle to it.